Health Care Costs and Financing

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In 1980, managed care was largely limited to a few health maintenance organizations (HMOs) scattered around the country. Today, nearly 200 million Americans are enrolled in managed care organizations (MCOs), including HMOs, preferred provider organizations, and point of service plans. Three recent studies supported by the Agency for Healthcare Research and Quality examined the impact of managed care.

The first study describes the trend toward a greater balance of power between health plan purchasers, MCOs, physicians, and patients during the 1990s. The second study reveals that greater managed care penetration of local health care markets is associated with growing hospital consolidation and substantially fewer physicians in solo practice. The third study concludes that managed care does not necessarily restrict access to mental health specialists, although certain managed care strategies do.

From a sociological perspective, U.S. managed care initially shifted power and control of the health care system away from physicians to organizational purchasers and MCOs. Employers and other plan purchasers had a power advantage over MCOs, which held a power advantage over physicians who, in turn, held a power advantage over patients. Yet in the past decade, this power structure gradually shifted to lessen the power dominance of purchasers and MCOs. That's the conclusion of this study of U.S. managed care from a social exchange perspective. In the past, plan purchasers were price-setters rather than price-takers. However, forecasts for 2000 indicated that MCOs would experience double-digit rate increases that year, suggesting that purchaser-MCO relationships were beginning to move toward more balanced power, in part through MCO coalition formation.

Similarly, physician coalition formation (via specialty group practices, physician-run networks, and unions) has reduced the power dominance of MCOs over physicians. These coalitions increased physicians' clout when contracting with MCOs and decreased the number of alternative sources of care with which the MCOs could contract. State "any willing provider" laws, which require MCOs to open their networks to any provider who wants to join, also contributed to greater MCO-physician power balance. Some physicians are even dropping MCOs with the lowest reimbursement rates or the most administrative hassles, moving to markets with low managed care penetration, or simply retiring early.

Not to be left out, patients are gaining more power in their relationships with doctors due to widespread daily dissemination of health information via the Internet and media about alternative treatments and sources of care. In addition, consumer dissatisfaction with and erosion of trust in MCOs are widespread. As the 1990s economic expansion accelerated and labor markets tightened in the country, employer dependence on employees increased. As a result, employers and MCOs responded to employee concerns about MCO restrictions by offering employees a greater choice of health plans and relaxing some MCO controls.

Greater managed care penetration in a local metropolitan health care market is associated with growing hospital consolidation and a sharp decline in the number of physicians in solo practice, according to this study. As a result of hospital system formation and closings, in the average market (managed care penetration equaled 34 percent in 1994), managed care was associated with a change in a competition index that was equivalent to moving from 10.4 to 6.5 equal-sized hospitals between 1981 and 1994. At the same time, between 1986 and 1995, managed care was associated with a decline from 38 percent to 24 percent in the share of physicians in solo practice.

The growth of managed care apparently created pressure for consolidation that more than offset all remaining factors, such as income growth and demographic and regulatory changes, that would have otherwise caused an increase in the number of hospitals in the average market. Managed care also was a powerful driver of change in physician practice patterns. Both hospitals and physicians may merge to generate cost efficiencies by sharing resources and to increase their market power. Whatever the forces driving consolidation, if consolidated hospitals are more resistant to MCO discounting, this may limit managed care's future ability to use selective contracting to constrain costs, conclude the researchers. They used American Hospital Association data from 1981 and 1994, American Medical Association data for 1986-1995, and government census data to examine how variation in managed care penetration affected hospital markets and physician practice sizes in large metropolitan areas.

Highly managed MCOs typically impose controls that encourage primary care doctors to treat most forms of depression and to limit referrals to higher cost mental health specialists such as psychiatrists. However, the intensity of managed care is not generally associated with access to mental health specialists, according to this study. It found that while some managed care strategies reduced access of depressed primary care patients to mental health specialists, they were offset by other strategies that increased access.

For example, among low-income patients, a physician financial penalty for referral was associated with fewer mental health referrals. A physician productivity bonus (for seeing more patients per hour) was associated with greater access to mental health specialists, perhaps because these doctors had incentives to refer patients who require longer or more frequent office visits. Overall, 23 percent of depressed patients were referred to mental health specialists, and 38 percent saw a mental health specialist with or without a referral.

Depressed patients in intensely managed plans had more improvement in depressive symptoms and number of days of depression-related restricted activity compared with patients in less-managed plans. Still, patients gave lower ratings to the primary care of physicians in more intensely managed offices, which is consistent with previous studies. These findings are based on a survey of 1,336 adults with depressive symptoms who visited 261 primary care doctors in private practice in Seattle. The patients completed surveys 1, 3, and 6 months after seeing the doctor.